Charlotte's Web Holdings Inc.

Charlotte’s Web Holdings Inc. (TSX: CWEB) is engaged in the production and marketing of hemp-based cannabidiol (CBD) wellness products. The company’s product categories include tinctures (liquid product), capsules and topical products. 

Key Updates:

• Approval of two patents: Recently, the group received two U.S. Utility Patents for the hemp genetics by the United States Patent and Trademark Office. The newly issued patents cover two of the Company's new feminized seed hybrid hemp varieties developed under the Company's breeding program; 'Kirsche' and 'Lindorea'
• Recent Acquisition to support future growth: The company has well-established brand within whole-plant hemp health supplements. With the recent acquisitions of CBD CLINIC, CBDMEDIC, and Harmony Hemp brand, we expect the momentum to continue in the coming days. Moreover, the company is also focusing on enhancing the Company’s brand appeal both domestically and internationally.

Q3FY20 Financial Highlights:

• CWEB declared its quarterly results, wherein the group posted revenue of USD 25.156 million, slightly higher than USD 25.045 million in the previous corresponding period (pcp).
• Gross profit declined to USD 14.757 million, from USD 17.881 million in Q3FY19, primarily due to a significant increase in the cost of sales (USD 9.898 million versus USD 7.181 million in pcp).
• CWEB reported an operating loss of USD 13.55 million, stood considerably higher from USD 1.719 million in Q3FY19. The decline in profitability was majorly attributable to a higher general and administrative expense (USD 17.816 million versus USD 13.064 million in pcp) coupled with increased sales and marketing expenses (USD 8.512 million versus USD 6.281 million in Q3FY19). Moreover, an elevated research and development expense (USD 1.984 million versus USD 0.255 million in Q3FY19) also contributed to the lower profitability.
• CWEB reported a cash balance of USD 65.891 million, while total assets stood at USD 330.46 million.

Q3FY20 Income Statement Highlights (Source: Company Presentations)

Risks: The products are relatively new to the consumers and a change in the consumer preference would impact the overall volumes. Moreover, due to the lengthy process of product-approval and product innovations, coupled with the expansion of the marketing network, the group might witness higher input costs, which might lead to a fall in the profitability.

Valuation Methodology (Illustrative): EV to Sales

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The stock of CWEB gained ~13% and ~38% in the last one month and three months, respectively. Due to the entry of new players within the cannabis segment, recently the company has reduced its product prices in order to stay afloat within the competition, which impacted overall revenue. Meanwhile, direct-to-consumer (DTC) revenue increased ~30% on y-o-y during 9MFY20, constituting 67.8% of the total revenue, as compared to 49.6%, a year ago. The increase in the DTC segment was due to the company’s focus on increasing the targeted promotions, which is encouraging. Also, the victory of President Joe Biden has created a lot of hope for Cannabis market in future. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Cresco Labs Inc, CV Sciences Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.13 on January 29, 2021.

CWEB Daily Technical Chart. Source: Refinitiv (Thomson Reuters) 

Delta 9 Cannabis Inc

Delta 9 Cannabis Inc (TSX: DN), formerly SVT Capital Corp, is a Canada-based company engaged in Biotechnology & Medical Research. The principal activities of The Company are the production, storage and sale of medical marijuana.

Key highlights 

• Expansion of production facility: Presently the Company had 297 Grow Pods fully licensed and approved by Health Canada in service, consisting of 262 Grow Pods used to produce cannabis and 35 Grow Pods used for non-production plants. The Company anticipates that the current licensed Grow Pods would have an annual production capacity of approximately 8,325 kilograms of dried cannabis per year. The group is expanding its production facility and after completion of the Phase II expansion, the Company anticipates having up to 420 licensed Grow Pods in service that would increase the Company's overall cannabis production capacity by 3,650 kilograms to 11,975 kilograms of dried cannabis per year.

• Retail Cannabis Sales:The management is actively pursuing retail expansion opportunities in all Canadian provinces, which allow for privatized retail cannabis sales and will continue to expand on its vertical integration into the retail segment. The Company plans to open and operate up to an additional 12 retail outlet stores (7 by Delta 9 Lifestyle in Manitoba and up to 5 by Delta 9 Cannabis Store over the next 24 months. Recently the Company announced the grand opening of its ninth Delta 9 Cannabis retail store.

Financial overview: Q3FY20

Source: Company 

• In Q3 2020, the Company registered healthy growth in sales to CAD 13.1 million, against CAD 6.6 million in the previous corresponding period. The rise was due to strong performance in its retail and wholesale cannabis segments while the Company experienced general weakness in its B2B revenues.
• Before accounting for changes in the fair value of biological assets, gross profit stood at CAD 3.9 million, against CAD 2 million in pcp.
• The Company reported a loss from operations in Q3 2020 at CAD 4.9 million, compared to the loss of CAD 0.6 million in Q3 2019. Higher G&A expenses, S&M expenses, share-based compensation, coupled with a fair value of inventory realization, dragged the losses.
• Net loss in Q3 2020 stood at CAD 5.5 million, against a loss of CAD 1.2 million in the previous corresponding period. The factors discussed above played a crucial role in increasing net loss. 

Risks associated with investment

Several risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect future events and financial performance. Some of these risks include reliance on licences and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, etc. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

We believe that the Company's diversified revenue and growth strategies have contributed towards significant revenue growth as the group witnessed robust increases in net revenue, which is a positive indication. The Company recently announced its ninth Delta 9 Cannabis retail store's grand opening and further plans to open and operate additional 12 retail outlet stores within 24 months. Furthermore, the group expands its cultivation capacity, which we feel would derive more revenues and cash flows in the foreseeable time frame on the back of healthy demand. Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Speculative Buy" rating at the closing price of CAD 0.47 on January 29, 2021. We have considered Aytu BioScience Inc, Supreme Cannabis Company Inc, Vivo Cannabis Inc, etc. as the peer group for the comparison.

Technical Price Chart (as on January 29^th, 2021).Source: Refinitiv (Thomson Reuters)

Disclaimer

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